Experiment Fund looks ahead

Patrick-Chung.low res

When the Experiment Fund (Xfund) kicked off three years ago, it was exactly what it sounds: A New Enterprise Associates experiment to set up shop at Harvard University and to back young entrepreneurs connected to the university and other schools nearby.

Now the slightly less than $10 million fund has five investments under its belt, a small group of additional backers, including Accel Partners, Polaris Partners and Breyer Capital, and a track record that is encouraging it to broaden its horizons.

A second, larger fund appears to be on the way with the goal of revving up the investment pace.

“The purpose of Xfund has been to produce really great Series A investments for NEA, Accel and Polaris,” said NEA Partner Patrick Chung, a founding partner of the Xfund. By that measure it has been a success.

Chung recently told VCJ, a peHUB affiliate publication, that the average markup of the portfolio from seed valuation to current valuation is over 10x.

With the university eager to see more investing and the entrepreneurial community responding with greater than expected interest, Chung said he wants to put more resources to work and back portfolio winners with follow-ons.

The fund’s investments so far include Kensho Technologies, developer of a natural language product for financial research; Ravel, provider of a research service for lawyers; Philo, operator of a TV service for students; Zumper, manager of an apartment rental service; and Rest Devices, developer of wearable technology for babies.

Four of the five companies have so far raised additional Series A rounds, including from other investors. Chung said only Rest Devices has not yet gone out for a Series A. “Our hope and expectation is they will also raise, and at a significantly higher valuation,” he said.

Chung said the fund, which invests up to $500,000 in seed deals, is open to entrepreneurs beyond Harvard, or even Massachusetts, but that it doesn’t back current students.

Dan Primack of Fortune reported on Tuesday that Chung is in the process of moving on from NEA to devote all his time to work on the Xfund when it raises its second pool of capital. Chung and NEA did not respond to follow up calls by VCJ.

Before the Fortune article appeared, VCJ recently had the chance to catch up with Chung. Below is a shortened version of the published article in VCJ.

Q: What’s your selection process for investments?

A: Of the 3,000 inbound proposals, a little more than 900 have been individually reviewed. That means we’ve had a meeting with them or phone calls or an e-mail exchange, if they have been far away.

That is done primarily by our team in Cambridge, which is home to our partner Hugo Van Vuuren. Of the 900, about 10 percent, or 91, have bubbled up to be whole partner decisions.

Q: Who makes up the investment committee?

A: The investment committee of the Experiment Fund consists of me, Hugo, Harry Weller of NEA, Jim Breyer and Ping Li from Accel, and Alan Crane from Polaris.

(Although Chung said Breyer was on the investment committee, in a follow-up email after publication, he said that since Breyer was elected to the Harvard Corporation, which happened in February 2013, he is no longer on the investment committee. Breyer remains on the Xfund board.)

Q: How has the fund performed?

A: The results that we look for from the venture side are: Are we investing in phenomenal companies and are they performing?

The average markup in our portfolio to date is over 10x, from the seed valuation to the current valuation. This is really an extraordinary result.

Q: It strikes me you’ve put in a great deal of effort for a small number of investments. Have you found the right balance?

A: I agree that it is too selective. That’s because when we started the Experiment Fund, it was true to its name. It was an experiment. We didn’t know how much demand there would be. We thought we would see about 500 deals. We ended up seeing 3,000.

We didn’t know how it would work with the university and the community. Turns out the community and the university have embraced Xfund. Going forward, the university wants us to do more on campus, invest in more companies and contribute more to the community.

Q: Sounds like you are getting ready to raise an Xfund II?

A: There will definitely be an Xfund II. We’re talking about this now.

Q: You expect your second fund to be larger?

A: Definitely.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ and other venture-related research products, click here for the Marketplace.

Photo of Patrick Chung courtesy of New Enterprise Associates.

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